Regarding Indonesia, the spotlight remains sharply focused on the drastically depreciating rupiah exchange rate. As speculation is growing that the US Federal Reserve will soon raise its interest rate regime, emerging market assets (both currencies and stocks) tend to weaken. However, although most Asian emerging currencies are weakening against the US dollar, the rupiah is particularly vulnerable as Indonesia is plagued by a wide current account deficit, which informs investors that the country is relying on foreign capital inflows.
According to the latest statements of Indonesia’s central bank (Bank Indonesia), the country’s current account deficit will widen slightly to (at least) 3 percent of gross domestic product (GDP) in 2015, a level which is generally considered the boundary between a ‘sustainable’ and an ‘unsustainable’ current account deficit. The deficit had narrowed to 2.95 percent of GDP (USD $6.1 billion) in 2014 from 3.18 percent of GDP in the preceding year, but is expected to widen this year. Yesterday, the Indonesian government announced that it would impose several new regulations in a move to support the rupiah rate. These measures include temporary anti-dumping import duties (although authorities declined to inform which imported products are targeted). This new regulation basically means that anti-dumping import duties can be implemented more quickly (without needing to wait for results of an investigation conducted by the Trade Ministry). The Indonesian Finance Ministry will also offer tax breaks to those companies that export more than 30 percent of their production. These new regulations aim to improve the current account deficit (and domestic manufacturing industry) and thus should ease pressures on the Indonesian rupiah.
On Wednesday (11/03), the Bloomberg index that tracks 20 emerging-country currencies fell for a 10th day to a record low due to better-than-expected US jobs data. The rupiah had depreciated 1.13 percent to IDR 13,243 per US dollar by 12:05 am local Jakarta time (Bloomberg Dollar Index).
Moreover, Bank Indonesia has recently signalled on various occasions that it is comfortable with a weak rupiah as that would make Indonesian exports more competitive on the global market, thereby improving the current account balance (which then should support the rupiah). However, this is also worrisome for investors as it dents companies’ earnings outlook as for every 1 percent rupiah depreciation (against the US dollar), Indonesian companies’ earnings per share growth declines 0.8 percent (according to Bahana Securities). On Wednesday (11/03), the benchmark stock index of Indonesian (Jakarta Composite Index) fell 0.88 percent to 5,415.10 points during the first trading session.
Emerging currencies, including the rupiah, are also negatively impacted by increased liquidity in Europe and Japan due to the looser monetary policy packages of the European Central Bank and the Bank of Japan. These policies not only add liquidity, but also make the euro and Japan’s yen weak dragging down other currencies.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.80 percent to IDR 13,164 per US dollar on Wednesday (11/03).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Indonesia is the second-worst performing emerging Asian currency this year so far (after Malaysia’s ringgit), having depreciated more than 5 percent against the US dollar.